Alibaba Group

Pathways to Profitability with

Holding Limited
Restructuring reopening Investment Memo
BUY: (SEHK: 9988) another chapter of growth 20 April 2023
Company Overview
Alibaba Group Holding Limited (SEHK: 9988) is a universal conglomerate & one of China’s
leading e-commerce giants, with interests from logistics and food delivery to cloud computing.
Comprising 3 core business segments – Alibaba.com, Taobao and Tmall. Taobao is Alibaba
Group’s flagship brand generating >80% revenue with primary driver attributed to high demand
for quality imported brands in China. The company is well positioned in the New Retail Space,
synthesizing digital payments, e-commerce, food delivery and other parts of the business into
a consolidated ecosystem. Transition of retail commerce to digital mediums and growth in
smartphone adoption across emerging markets is a primary enabler for growth and traction in
the region. Additionally, the Group is also competitive in the cloud services and entertainment
and media markets, with strong revenue contributors to the Group in recent years.

12M Industry Outlook

The e-commerce market, of which Alibaba primarily operates in, is a highly saturated and
fragmented one. With lucrative accretive opportunities with the digitalization of the retail
commerce space, intense competition is a significant risk factor in a potential investment in the
Group. Yet, with the global e-commerce market valued at over US$11T, with a projected
CAGR of 14.7% (2020-2027), the e-commerce sector is primed for tremendous growth with
numerous pathways to profitability in this space. One of the main factors driving this growth is
the increasing penetration of internet and increasing number of smartphone users across the
world. The e-commerce sector comprises a nearly unlimited range of products and services.
Among those, there are some, such as financial services, digital content, travel and leisure
that are gaining traction, and the overall magnitude of growth of the e-commerce segment, and
consequently the Group’s business, is expected to be closely correlated with the performance
of these respective sectors. Additionally, improved technological awareness among the
population is expected to be a bullish indicator of future market opportunities.

As such, the LR performance of the Group is contigent on its ability to establish & retain its
unique selling points, yield customer acquisition costs and improve customer LTV through
greater focus optimizing CX. Additionally, overall performance of its other business segments
would be a critical factor in helping to facilitate network economies of scale, improving
operating margins and driving core metrics to more attractive levels (EV/EBITDA, P/E, P/B)
Investment Theses
1. Diversified supply-chain and low-cost margins provide comparative
advantage which support growth in asset prices
Global foothold with Asian focus improves profitability through arbitrage due to ability to get
cheaper inputs whilst selling outputs at higher prices in other markets. Intimate affiliations with
other business segments along with extensive network of business partners provide network
economies of scale which allows capturing of low-cost opportunities, maximizing value and
fueling accretive potential
 Alibaba Group
Pathways to Profitability with
Holding Limited
Restructuring reopening Investment Memo
BUY: (SEHK: 9988) another chapter of growth 20 April 2023
Investment Theses
2. Well-positioned to capitalize upon expected tailwinds in e-commerce and
cloud computing segments which catalyze pathways to profitability
Alibaba boasts the largest e-commerce platform and cloud services provider in North Asia and
Greater China, with ~45% market share (measured in gross merchandise volume/GMV) and
~37% market share in both verticals respectively. Improved rates of adoption, tech literacy and
fluency and advancements in Industry 4.0 sophistications function as broad catalysts for
growth in e-commerce and cloud verticals.

On the e-commerce end, Alibaba’s investment in community marketplaces and improving

customer experience (CX) reflect its commitment & prioritization on connecting with a more
diversified mix of consumer segments and focus on consumer to prolong and maximize
customer LTV. We expect the restructuring to grant Alibaba’s core commerce segment greater
autonomy to focus and pursue these aspects whilst retaining close affiliation to its other
business segments, leveraging on network economies of scale and supporting overall LR
growth. In Alibaba’s cloud business, increased demand from key verticals, improvement of
macro conditions and overall recovery of both the Chinese economy and consumer internet
sectors support future growth prospects.

3. Group Restructuring a strong indicator of flexibility and willingness to

adapt & evolve to remain competitive
On 28 March 2023, Alibaba Group announced its decision to “re-organize” its business into 6
distinct entities, 5 of which (ex- Taobao-Tmall) could seek external fundraising, in a bid to
improve the Group’s collective competitiveness and individual business segments’ agility to
react & respond to headwinds in the industry. This news was welcomed by investors as a
positive sign of the business being open, adaptable and malleable to change to stay relevant
amidst tighter margins and increased competition in the e-commerce and consumer internet
segments, evidenced by a surge in intraday trading volumes and prices. Increased market
scrutiny by “exposing” previous insulated business units to the rigor of the public markets will
facilitate greater levels of accountability, which will foster greater economies of efficiency and
incubate greater competitiveness and fuel long-run accretive potential

Using the SOTP valuation methodology, we expect higher margins with prospects primarily
fueled by the local service and international commerce segments, driven by improved unit
economics, increase in value-added service offerings and narrowing losses from consolidation
of operations and establishment of economies of scale. As such, we believe that the “sum of
the parts is greater than it’s whole” narrative is highly relevant and applicable to Alibaba’s
recent restructuring efforts and supportive of future potential uptick in asset prices.
Investment Risks & Conclusion
Despite the lucrative market opportunity that exists, several investment risks exist. Policy risks
from regulatory uncertainty in the Chinese government, stifling competition from other retailers
and earnings drag from investors in new initiatives serve as impediments to growth. However,
we are bullish on the overall LR prospects of the Group, and propose a BUY call based on the
aforementioned three theses of diversified supply-chain & strong network economies of scale;
supportive tailwinds that characterize fruitful market opportunities in e-commerce and cloud
services and expected improved modes of efficiency and boosts in competitive edge stemming
from restructuring initiative